Covington & Burling

December 18, 2002

Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: Sarbanes-Oxley Act § 307 - Implementation
of Standards of Professional Conduct for
Attorneys - Part 205 (File No. 33-8150.wp)

Dear Mr. Katz:

This supplements views we have expressed along with other law firms (the "77 Law Firms Letter") on the above referenced rule proposal. We are submitting this letter to convey our concerns in several additional respects, including particularly as regards proposed Part 205's concept of an "appropriate response."

We appreciate the substantial effort the Commission and its Staff are undertaking in the implementation of the Sarbanes-Oxley Act of 2002. Section 307 of the Act carries its own special challenges in requiring the Commission to issue rules in a controversial and complex area on a short deadline. We believe that the Commission's initial proposal is an ambitious response to Congress's directive. We also believe, however, that, for a number of reasons, a less ambitious rule, especially at the outset, would best serve the interests of the investing public as well as the relationship of confidence between attorneys and their clients.

The lawyer's contribution to good securities disclosure depends upon a number of factors, most crucially, the lawyer's competence, integrity and conscientiousness. It is difficult to impose these qualities by legislation or rule. Instead, we expect issuers to seek out these qualities in an effort to meet their compliance obligations. We are concerned that proposed Part 205, unless revised appropriately, will work against this expectation and actually discourage issuers from involving competent, honest and conscientious lawyers in the disclosure process.

In the first instance, as pointed out in the 77 Law Firms Letter, our concern is most focused on the "noisy withdrawal" provision. This is a provision which prescribes an extraordinary action which should be warranted only in extraordinary circumstances. We believe that this aspect of the rule alone would likely have a widespread disruptive effect upon issuers' confidence in their lawyers and upon the nature of their relationship with their lawyers. For the reasons given in the 77 Law Firms Letter, we believe the Commission should defer adopting any rules relating to "noisy withdrawal."

In addition to the broad ethical and policy issues involved, we would also stress that application of "noisy withdrawal" requirements to past violations, and to continuing disclosure violations relating to past violations, raises serious constitutional issues under the Sixth Amendment right to effective representation by counsel in criminal cases and the Fifth Amendment privilege against self-incrimination. These considerations would be especially problematic if counsel representing an issuer in pending or potential Commission enforcement proceedings were to be subject to Part 205. Particularly under a "reasonably believes" standard, such counsel's concerns regarding his or her potential Part 205 liability would undercut his or her ability to defend the issuer with arguments that the conduct in question does not violate the law. See, e.g., N.Y. State Bar Op. 562 (1984); N.Y. State Bar Op. 674 (1995). In fact, the problem would be present even under a narrower "reasonably certain" standard such as that used by the A.B.A. Commission on Evaluation of the Rules of Professional Conduct in its proposed broadening beyond violent crime of the permissive disclosure provision of Model Rule 1.6.

Even without its "noisy withdrawal" provisions, however, proposed Part 205 would impose unwarranted pressures upon lawyers in many situations which would undermine client confidence (and might still, in some situations, raise constitutional issues of the type referred to in the preceding paragraph). Loss of client confidence may be a price that must be paid in unusual cases where the client is clearly engaged in a material violation of law and refuses to take corrective steps. This is the situation we believe Congress intended to address in the Act. Matters are often not so clear, however, and in many cases even a reasonable investigation will not make them clear.

These unclear cases will create a dilemma for the lawyer under proposed Part 205. If he or she doesn't report the matter "up the ladder," or doesn't persist farther "up the ladder" when the chief legal officer's inquiry proves inconclusive, the lawyer will risk being found in hindsight to have violated Part 205. Under such pressure, the conscientious lawyer will frequently take the conservative course under the rule and push the case "up the ladder." Each time this happens, of course, the lawyer will likely undermine his or her relationship both with the company officer or employee whose conduct has been reported, and with the chief legal officer and any other "up the ladder" attorney whose handling of the case the lawyer has questioned. Moreover, the process will cost the company money.

This, we believe, will cause management and inside legal personnel, who may once have valued access to conscientious legal advice, even while they may sometimes have disagreed with that advice, to fear it. The resulting incentive to retain less probing and less cautious lawyers is obvious. Also obvious is the chilling effect upon the client's desire to consult counsel at all on many disclosure issues. The lawyer, too, will be influenced by this chilling effect. The lawyer's due diligence inquiries in the course of preparing disclosure documents will be inhibited by his or her concern that too probing a due diligence question will produce an answer triggering an "up the ladder" obligation under Part 205. All of these factors would tend toward a deterioration, rather than an improvement, in the quality of issuer disclosure.

We believe the Commission can mitigate these concerns by narrowing the rule in accordance with the recommendations in the 77 Law Firms Letter. This would include revision of the criteria for awareness of "evidence of a material violation" to focus upon the lawyer's actual understanding rather than that of a "reasonable lawyer". Such a narrowing would go a long way to reducing both the client's and the lawyer's fears of being second-guessed and pressured in situations where differing views and judgments are not inappropriate.

One additional defined term which would bear heavily upon the lawyer's fear of unwarranted second-guessing is "appropriate response." We strongly recommend that the Commission modify the definition of this term, and the corresponding trigger for the chief legal officer's obligation to take "necessary steps" under proposed section 205.3(b)(3). Specifically, we think the rule should state explicitly that neither the reporting lawyer nor the chief legal officer need take the affirmative actions required by section 205.3(b)(3), (4) or (8) unless the actions are based on the lawyer's actual understanding with respect to a clear material violation of law (or, in the reporting lawyer's case, that the chief legal officer or chief executive officer has failed to respond to the report).

Under proposed Part 205, once the reporting lawyer initiates the "up the ladder" process, both the reporting lawyer and the chief legal officer must apparently continue to pursue the process unless, after reasonable inquiry by the chief legal officer, either (i) the issuer takes affirmative corrective measures as set forth in section 205.3(b)(3) and clause (2) of the definition of "appropriate response," or (ii) they reasonably believe no material violation has occurred. This requirement does not address the case, which we believe will occur frequently, where the chief legal officer's reasonable inquiry is inconclusive. Even after a reasonable inquiry, while the reporting lawyer and the chief legal officer may not find that there is a clear material violation, they may also be concerned that there is not conclusive evidence to the contrary. The difficulty of reaching an appropriate level of confidence will be compounded by the dangers of second-guessing inherent in the "reasonably believes" standard and, in the case of the reporting lawyer, by the lawyer's non-participation in the inquiry and possible lack of expertise regarding its subject matter. (Lawyers will have a parallel problem if a material violation is found to exist and they must evaluate the adequacy of the corrective measures taken by the issuer.)

Again, the likely result will be that conscientious lawyers will feel compelled to press the doubtful cases "up the ladder," and conscientious chief legal officers will feel compelled to take the enumerated "necessary steps," even if they are far from sure that there is a violation which needs to be corrected. We believe this result would be unwarranted and disruptive and would contribute to the problem discussed at the beginning of this letter. We recommend that the Commission revise Part 205 to address this concern: if, after the chief legal officer's reasonable inquiry, the chief legal officer (or the reporting lawyer, as applicable) does not believe a material violation has been affirmatively demonstrated, we propose that the rule state that the chief legal officer (or the reporting lawyer) will have no obligation to proceed further. Similarly, if the issuer takes corrective steps with regard to a material violation, the rule should provide that the lawyer's obligation will be discharged unless the lawyer affirmatively believes the steps are inadequate.

We appreciate this opportunity to express our additional concerns.

Respectfully submitted,

Covington & Burling

cc: Hon. Harvey L. Pitt, Chairman
Hon. Paul S. Atkins, Commissioner
Hon. Roel C. Campos, Commissioner
Hon. Cynthia A. Glassman, Commissioner
Hon. Harvey J. Goldschmid, Commissioner

Giovanni P. Prezioso, General Counsel
Alan L. Beller, Director, Division of Corporation Finance